Banks and businesses alike are heading toward the 11th hour of changes in accounting standards, which will have a major impact on how companies report financial metrics and performance. The changes, initiated by the Financial Accounting Standards Board (FASB), will affect the way businesses report on leasing costs, revenue recognition, credit losses, financial assets and liabilities, derivatives and hedging.
Experts say the move will not go unnoticed when the accounting standards begin to take effect for public companies in 2021.
For companies, the changes will disrupt their financial reporting in a big way when the requirements come into effect. A PwC poll released in May, surveying 3,000 corporate finance executives, found that nearly half remained in the assessment phase of adopting revenue-recognition standards, while one-third were still remediating known issues. Less than one-quarter of respondents at the time had completed their preparations to implement the changes, according to Accounting Today reports.
Analysts warned that the requirements are likely to place a greater burden on staff, and may force some businesses to allocate more resources to remain compliant. However, the changes are intended to streamline corporates' view of their financials, experts said.
According to Calcbench Co-founder and CEO Pranav Ghai, changes to how companies report leasing costs "will provide a level of visibility into financial statements that previously didn't exist."
In a statement last week announcing a new report on the changes, Ghai said, "Financial metrics, like return on assets [ROAs], could change. Debt covenants might need to be renegotiated. The value of leased assets might be impaired, which hits net income. This standard is a big change with potentially significant implications."
"There is no doubt that the lease accounting standards will add new complexities to a broad range of business functions, including sales, lending, contracting and financial reporting," wrote Whitney Schiffer, CPA, in an article last week for accounting and advisory firm Berkowitz Pollack Brant. "However, under the new rules, businesses will be able to centralize the inventory and management of all lease arrangements and gain a clearer view of whether those assets are improving business performance."
Small Businesses, Banks Affected
Analysts warned that while publicly traded companies and large private firms are likely to see widespread impacts from these changes, small businesses (SMBs) and banks are likely to see disruption, too, particularly in the business lending space.
"The standard is very complicated, and one of the things that we recommend to our clients, that either have a loan or plan to get a loan, is that the banks are going to be looking for a level of confidence and comfort in what they’re getting from the company," Deloitte's Mark Davis told Accounting Today, discussing the impact of revenue recognition changes. "They want to see that things are under control."
Small businesses, particularly those in the technology industry, may be affected by some of these changes as well, though Davis added that it depends on the industry in which SMBs operate. Companies that are hoping to go public must also ensure that they are prepared and compliant with these new standards, reports said.
Even some banks will be kept on their toes. According to Cherry Bekaert LLP, Bank of America has allocated a 50-person team to prepare for adjusted credit loss standards. However, small community banks without such resources are sounding their concerns.
Community bank representatives at the recent AICPA National Conference on Banks and Savings Institutions noted that some have only one expert designated to implement the standards. One financial institution (FI), First National, said it does not record credit scores and purges customer loan data after a loan is repaid in full, both of which are barriers to implementing these changes. According to the publication, in anticipation of community banks' and credit unions' challenges, the FASB delayed its implementation deadline to 2022.